Fitch affirms NBQ at 'BBB+'; outlook stable

The Support Rating Floor is affirmed at 'BBB+'. The Outlook for the Long-term IDR is Stable.

NBQ's IDRs are driven by expected support from the UAE authorities. As the LT IDR is currently at the Support Rating Floor, downside risk is limited. Upside on the Individual rating is limited. Downside pressure on the Individual rating could arise from significant deterioration in asset quality resulting in lower profitability and capital ratios and/or further material decline in liquidity.

NBQ's operating profits increased 13% yoy in Q109. Revenue growth is, however, likely to slow in 2009 as the UAE economy, particularly Dubai, weakens leading to lower business volumes. Additionally, higher expected loan impairment charges will pressure profitability. Lower valuations on equity investments - if markets do not pick up - will also negatively affect performance. Cost efficiency, however, remains satisfactory.

While the biggest risk is asset quality, impaired loans stood at a sound 1.5% of end-Q109 gross loans. The loan portfolio, however, is somewhat concentrated and 60% of the bank's business is in Dubai. The seasoning of loans, following dramatic loan growth in the last three years, particularly in 2008 when the loan portfolio almost doubled, could result in problem loans as the credit cycle changes. Market risks mainly arise from the bank's equity investments.

Funding is mainly from customer deposits (63% of end-2008 total liabilities) and Fitch gains comfort from government support to alleviate pressure on liquidity. The total regulatory capital adequacy ratio stood at a satisfactory 18.1% at end-Q109, almost entirely Tier 1. Additionally, the bank has exercised the option to convert deposits received from the Ministry of Finance to Tier II capital. The MoF will advise the bank on the date of conversion.

NBQ was established in 1982 by the ruler of Umm Al-Qaiwain and remains 30% owned by that emirate's government. The bank focuses on wholesale banking but is placing greater emphasis on retail banking activity. It held around 1% of UAE banking system assets at end-2008. In August 2008, Global Investment House (Global, rated LT IDR 'D'), a Kuwaiti investment company, announced that it had agreed in principle to acquire a 20% stake in NBQ. However the acquisition did not proceed. There are currently legal proceedings between both companies with NBQ holding the $250m transferred by Global as an advance payment to a proposed convertible bond issue.